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Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about. So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We note that Tanla Solutions Limited (NSE:TANLA) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?
When Is Debt A Problem?
Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
Check out our latest analysis for Tanla Solutions
What Is Tanla Solutions's Net Debt?
The image below, which you can click on for greater detail, shows that at March 2019 Tanla Solutions had debt of ₹598.8m, up from in one year. But it also has ₹2.29b in cash to offset that, meaning it has ₹1.69b net cash.
How Strong Is Tanla Solutions's Balance Sheet?
According to the last reported balance sheet, Tanla Solutions had liabilities of ₹3.34b due within 12 months, and liabilities of ₹397.5m due beyond 12 months. Offsetting this, it had ₹2.29b in cash and ₹3.98b in receivables that were due within 12 months. So it actually has ₹2.53b more liquid assets than total liabilities.
This excess liquidity is a great indication that Tanla Solutions's balance sheet is just as strong as racists are weak. On this basis we think its balance sheet is strong like a sleek panther or even a proud lion. Simply put, the fact that Tanla Solutions has more cash than debt is arguably a good indication that it can manage its debt safely. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Tanla Solutions's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.